To value a business, work out its maintainable annual profit. That is usually EBITDA: earnings before interest, tax, depreciation and amortisation. Multiply it by the market multiple paid for comparable companies, then adjust for the risks a buyer finds. The multiple, not the profit, is where most of the value moves.
The founder of a business we are trying to buy thinks it is worth two or three times what we would pay.
He is looking backwards.
At the years. The relationships. The reputation. The income it hands him every month.
We are looking forwards.
How much of that revenue survives if he leaves? How many of those relationships transfer? Who decides things when he is gone?
Right now, too much of it still needs him in the room.
That does not make it a bad business. It makes it worth less to us than it is to him.
Psychologists have a name for something close to this: the IKEA effect. In the original experiments, people valued IKEA boxes, origami and Lego more highly when they had built the things themselves. The effort became part of the worth in their heads. It added nothing for anybody else.
Spend twenty years building a company and the same bias gets expensive.
You remember the sleepless nights. The remortgage. The customers won one at a time. The quarter it nearly went under.
Of course it is worth more to you. You paid for it twice. Once with money, once with your life.
The buyer did not.
They are looking at future cash and everything that could stop it. If the revenue depends on you, they discount it. If the relationships depend on you, they discount those too. If the company stops performing the day you leave, your effort is not an asset.
It is evidence of risk.
That distance is the valuation gap. It is not a haggle. It is the space between the value of what you built and the value of what somebody else can safely own.
Understand that and the rest of this gets much easier. You still need the methods and the maths. But you also need to know why two companies with identical profit get offers millions apart.
How do you value a business?
Work out the maintainable annual profit, normally EBITDA. Multiply it by the market multiple for comparable companies. Then adjust for what a buyer finds when they look properly.
A company making £2m of EBITDA on a 3x multiple is worth £6m.
The same £2m company on a 6x multiple is worth £12m.
Same profit. Double the money.
You almost certainly pour your energy into the profit and treat the multiple as something the market hands you at the end.
That is the wrong way round.
Grinding out another point of margin is slow, hard work. The multiple is where the leverage sits, and it moves when a buyer believes your future earnings are safer, more transferable or more valuable than the average deal in your sector.
The formula is easy. The evidence behind the multiple is where the money is won and lost.
Why is your business worth a range, not a number?
Type your revenue into an online calculator and it hands you a precise figure. Reassuring. Also useless.
A business has no single correct value. It has a range.
Where you land in it depends on who is buying, why they want you, what else they could buy instead, and how much risk they think they are taking on.
The market shows this plainly. In the second half of 2025 the average reported EBITDA multiple for UK and Ireland mid-market deals was 5.4x. That average hides an enormous spread. Companies with £200k of EBITDA averaged 3.3x. Companies with £10m averaged 8.4x.
Same country. Same period. Same measure.
A five-turn gap.
So when somebody tells you businesses sell for three to five times profit, they are not wrong. They are giving you a range so wide it tells you almost nothing about yours.
Methods establish the range. Scrutiny decides where inside it you land.
What is the valuation for?
“What is my business worth?” sounds like one question.
It is at least five.
A valuation for selling is not a valuation for raising investment. Neither is a valuation for a shareholder dispute, an EMI scheme, a divorce or a tax event. A formal number for HMRC follows the Shares and Assets Valuation Manual and needs the right professional behind it.
There is another one, and it is far more useful while you are still running the thing.
The working valuation you do every year, to answer a harder question.
Is the business becoming more valuable, or just getting bigger?
That is the valuation this guide builds. If you need a formal number for tax or a court, hire a specialist. If you want to know what a buyer might pay and what would move it, keep reading.
How do you normalise the profit a buyer will trust?
Almost every private company sale starts from maintainable, normalised earnings. Usually a version of EBITDA.
Normalising means restating profit as it would look under new ownership.
You add back the above-market salary, the car, the one-off legal bill, the bad debt that will not repeat.
You also strip out the contract you have already lost, correct the salary you have been paying yourself that nobody would accept, and account for the senior hire you should have made two years ago and the buyer will need on day one.
This is where optimism starts costing you money.
Show the flattering number and the buyer’s analysts spend three weeks quietly taking it apart. Every add-back they reject comes off the price. Worse, every dubious one makes them wonder what else is in there.
A cleaner discipline: plot revenue and EBITDA as a rolling twelve-month total, updated monthly. Seasonality disappears. What is left is whether the underlying business is getting stronger.
The line should run up and to the right.
If it does not, no deck will hide it.
For the financial drivers underneath, read seven important quantitative factors that influence the value of your business.
Which valuation methods should you use?
The British Business Bank’s valuation guide sets out eight common approaches.
You do not need eight. You need the two or three that fit a company like yours, used together to build a range you can defend.
| Method | What it does | Best for |
|---|---|---|
| Earnings multiple | Multiplies maintainable EBITDA by a market multiple | Profitable, established companies |
| Revenue multiple | Multiplies revenue by an industry multiple | High-growth or pre-profit companies |
| Discounted cash flow | Forecasts future cash and discounts it for risk | Predictable, cash-generative companies |
| Asset valuation | Values net tangible and intangible assets | Asset-heavy or underperforming companies |
| Comparable transactions | Uses what similar companies actually sold for | Sense-checking every other method |
| Entry cost | Estimates what it would cost to build the company again | A floor for young companies |
Everybody reaches for the earnings multiple, so it is worth being precise about what it can and cannot do.
It tells you what the market paid for other companies.
It does not tell you why yours deserves the same.
That case has to be built.
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What does a worked valuation look like?
Say your company reports £2m of EBITDA.
The lazy valuation says established firms go for four to six times. Call it five. You are worth £10m.
The defensible one starts by normalising. Take out your personal package and a one-off contract win and maintainable EBITDA settles at £1.8m. Comparable deals in your sector have completed between 4x and 6x over eighteen months.
Your range is £7.2m to £10.8m.
Then diligence starts.
One customer is 30% of revenue. Down.
Your number two joined nine months ago. Down again.
Recurring revenue is 60% and climbing. Back up.
Every one of those moves the multiple, not the profit. Same company, same accounts, a spread of millions.
These figures are illustrative. They show the mechanics, not a market valuation for your sector.
Where will a buyer try to chip the price?
Start with the benchmark for comparable deals. Draw a line through it.
Below the line sit the weaknesses a buyer uses to cut the price, pull the multiple down, or move money into an earnout so you carry the risk they have just found.
Above it sits the evidence that justifies a premium.
Every valuation conversation is fought on that line. The buyer hunts below it. Your job is to defend what is down there and prove what is up here.
What sits below the valuation line?
A buyer’s offer is their valuation minus every risk they can see, then minus a margin for the risks they suspect are there.
Your job is to remove the visible ones and shrink the rest.
- Owner dependence. If revenue, relationships and decisions stop when you stop, you do not own a business. You own a demanding job with staff. That is not an insult. It is continuity risk.
- Customer concentration. Any customer big enough that losing it would hurt earnings is a threat to the buyer’s return.
- Volatile earnings. A rolling twelve-month line drifting down and to the right is a discount waiting to happen.
- Weak management depth. The buyer is not buying you. They are buying the team that runs it after you have gone.
- Messy financials. Unreviewed accounts, creative add-backs and investment buried in operating costs cost you price and trust.
- Undocumented operations. If the way you win and deliver work lives in people’s heads, it does not transfer. What does not transfer is not worth much.
- Open diligence issues. Gaps in contracts, IP ownership, employment records or data terms hand the buyer a reason to renegotiate late.
Daniel Domberger’s advice, after decades of doing deals, is to run diligence on yourself six to twelve months before a sale. Find the own goals before the buyer does.
None of that changes this year’s profit.
All of it changes how safe next year’s profit feels to somebody who did not build the place.
What earns a premium multiple?
Removing the downside keeps you inside the range.
Getting above it needs evidence of a different kind.
- Recurring, high-margin revenue. Predictable, repeatable, contracted where you can manage it.
- Visible growth. Daniel Havercroft puts it plainly: buyers pay more when they can see the route to the forecast. Recurring revenue makes that route believable.
- An investable management team. A team that has delivered growth without you in the room.
- Differentiation a buyer cannot cheaply recreate. A reason their board should buy your future rather than fund an internal alternative.
- Scalability. Systems and a model that work at twice the size. If doubling the company would double your problems, the multiple comes down.
- A credible growth story. Not a hockey stick. Pipeline, retention, products that ship, a market growing with you in it.
“I spent years believing the financials would decide the price. They did not. When we sold Peer 1 in 2013 the company went for about C$635m, at roughly 16.5 times earnings, the highest multiple paid for an IT or managed-services business at the time. The numbers got us into the range. High-margin recurring revenue, real scalability and a management team the buyer could believe in took us to the top of it. I had underrated all three.”
Dominic Monkhouse, founder of Monkhouse & Company. Scaled Rackspace UK and Peer 1 Hosting as Managing Director. Coached more than 200 founder-CEOs through scaling. Three Sunday Times Top 100 Best Companies to Work For.
For the full set of non-financial drivers, read six important qualitative factors that influence the value of your business.
Why do two companies with the same profit get different offers?
Two companies. Both £2m of EBITDA. Same sector, same month.
Company A depends on its founder. Its biggest customer is 35% of revenue. The rolling line is flat. The accounts are unreviewed. Nothing is documented. The management team is two people, one of whom is the founder’s brother-in-law.
All of that sits below the line.
Company B has 65% contracted recurring revenue. Its management team has delivered two years of growth without the founder in every meeting. The financials survive scrutiny. It owns a clear position in a growing niche.
All of that sits above it.
Company A gets the bottom of the range, with part of it pushed into an earnout, and should expect the number to move against it during diligence.
Company B gets several buyers competing.
Same profit. Different risk.
The calculator prices the EBITDA. The buyer prices the company.
What is your valuation gap?
Make it personal. Three numbers.
- What you want or need from a sale. After tax. What you actually keep, not the headline.
- The range you can defend today. Normalised earnings, current comparables, and an honest look below the line.
- The gap between them.
Many founders run this calculation for the first time in the middle of a sale process, when almost nothing can be changed.
Run it now, while almost everything can.
The gap closes two ways. Grow the earnings, or remove the reasons the multiple gets discounted.
The second is usually faster, cheaper and far more within your control.
These nine questions to ask before you start selling your business will expose the gaps before a buyer does.
What should you change in the next 90 days?
You do not need to be selling to start. You only need to want the company to be worth more.
- Build the rolling twelve-month dashboard. Revenue and EBITDA as a running total, updated monthly. If the line is not going up and to the right, that is your first job.
- Map your concentration. Customers, suppliers, key people. Anything whose loss would hurt earnings needs a plan.
- Test your independence. Take four weeks off. What breaks is your below-the-line list.
- Clean the financials. Get the accounts reviewed. Separate investment from operating costs so a buyer can see the machine underneath.
- Document how work is won and delivered. If a competent stranger could not run the process from the document, it is not a process yet.
- Get a professional view. A good M&A adviser will tell you where you sit against deals that actually completed in your sector, not where a calculator guesses. I know the good ones on both sides of the Atlantic, so drop me a line if you want a suggestion in the UK or the USA.
When should you start preparing to sell?
Bring in an adviser eighteen months to two years before you intend to sell.
Not to run the process. To show you which numbers and which risks future buyers will care about, so you can start building the evidence.
That timeline is not caution.
It is physics.
Customer concentration, management depth, recurring revenue and documented operations do not transform in a quarter. You earn a premium multiple by building the evidence before anybody asks to see it.
Domberger makes the other half of the point. A strong market is one factor, not three. The company still has to be attractive, bankable and prepared. Deals fail when a business is rushed to market before the evidence is ready.
When you want to build that plan, that is what exit planning is for.
How do you avoid earnout hell?
Plenty of sellers never see all the money in the headline.
They accept an earnout, then spend years working for somebody else in a company they used to own. Targets move. Priorities change. The buyer makes decisions that change the result. Eventually the seller gets bored, or frustrated, or pushed, and leaves money on the table.
The multiple gets you the offer.
The structure decides how much of it you keep.
A lower clean offer can be worth more than a dazzling headline tied to three years of conditions you do not control.
Do not optimise for the press release. Optimise for the cash you can actually take away.
Gerry Tombs did exactly that. He sold Clearvision to Eficode in October 2022 with 98% of the price paid up front, and he got there by making himself disposable two years before anybody made an offer. Neither side disclosed the headline number, so read the 98% as the shape of the deal rather than its size. What is public is a company turning over more than $104m at the time of sale, with over a hundred people across the UK and the States. Buyers do not pay 98% up front for a business that still needs its founder. They pay it for one that has already proved it does not. The full story is in the Clearvision case study, and Gerry talks it through on the podcast.
The uncomfortable truth
Go back to the company we are thinking about buying.
The founder is not greedy and he is not daft. This looks like the IKEA effect at work. He built something real over many years and wants the number to honour what it cost him.
But the price in his head is shaped by what the business means to him.
Ours is shaped by whether the revenue, the relationships and the decisions survive without him.
He is valuing the labour. We have to value the asset.
Nobody tells you this early enough.
A valuation is not a reward for the past. It is a price on the future, discounted for every risk the buyer inherits.
If the value collapses the moment you step away, you have not built enterprise value.
You have built yourself a well-paid job with overhead.
Which one have you built?
Frequently asked questions
Is a business worth three times profit?
Sometimes. Sometimes eight times, sometimes one. Three times profit sits inside a very wide range, and where you land is set by earnings quality, growth, recurring revenue, customer concentration, management depth and how much the business still depends on you. The multiple is evidence, not a rule of thumb.
Can you value a business on turnover?
Revenue multiples are common for high-growth or pre-profit companies, where earnings are not yet meaningful. For an established, profitable UK SME, maintainable earnings are the more defensible starting point. Turnover says nothing about margin or risk, so always cross-check it against profit and against comparable completed deals.
What is goodwill in a business valuation?
Goodwill is the value above identifiable net assets: customer relationships, brand, systems, people and predictable earnings. It only counts if it transfers to the buyer with the business. Goodwill that lives in your own relationships and judgement gets discounted heavily in diligence, because the buyer cannot rely on keeping it.
Should you use an online business valuation calculator?
For a first sketch, fine. For a decision that matters, no. A calculator cannot see customer concentration, management quality, owner dependence or the direction of your rolling twelve-month trend, and those are the things that move the multiple. A buyer sees all of them within a fortnight.
Who can formally value a UK business?
A chartered accountant, a corporate finance adviser or a specialist valuer. Match the professional to the purpose: tax, EMI, legal and shareholder-dispute work each have their own requirements. For a sale, choose somebody who knows current buyers in your sector and can cite transactions that actually completed.
How often should you value your business?
At least once a year, and again whenever earnings, ownership, market conditions or your exit plans change materially. Treat it as an annual health check rather than a one-off panic when you decide to sell. The point is to watch the direction of travel, not to fix a number.
What should you do next?
If the number you need and the value you can defend are miles apart, stop polishing the forecast.
Find the risk creating the discount. Build the management depth, the recurring revenue, the financial quality and the transferability that let you walk away clean.
That is how a valuation stops being an opinion and starts being evidence.
Do not wait for a buyer to price your weaknesses. Find them while you still have time to change them.
Four ways to take this further
- Book a Founder Freedom Call. If owner dependence, thin management depth or a valuation gap is holding your exit back, Dominic can help you work out which one to fix first. No obligation, no pitch. You will know quickly whether this is the right kind of help.
- Grab the book. Mind Your F**king Business shows founder-CEOs how to stop being the bottleneck and build a company that keeps performing without them in every room.
- Work through the exit-planning questions. Start there if you want to expose the gaps before a buyer prices them for you.
- Subscribe to the newsletter. One practical idea each week for building a more valuable business that depends less on you.
Your move. Write down the number you want, the range you can defend today, and the first risk you will remove this quarter.
About the author
Dominic Monkhouse scaled Rackspace UK and Peer 1 Hosting as Managing Director, taking both to a £30m annual run rate. He is the founder of Monkhouse & Company.